DCIT, Hyderabad V. M/s Hello Soft India PvtLtd., Hyderabad

ITA 645/HYD/2009

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 1449 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 8 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-01-2013
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 06-06-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 15-05-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M RAVINDER SAI
• Keywords: Related party transaction; Transfer pricing; Principle of natural justice; International transaction; Retrospective amendment
• Section: 92C; 143(3); 92B; 133(6); 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.645/HYD/09 ASST. YEAR 2005-06 DCIT, CIR-2(2), HYDERABAD. V/S. M/S. HELLOSOFT INDIA PVT. LTD., HYDERABAD. PAN:AAACZ 0688E (APPELLANT) (RESPONDENT) C.O. NO.40/HYD/09 IN ITA NO.645/HYD/09 ASST. YEAR 2005-06 & ITA NO.1411/HY D/10- ASST. YEAR 2006-07 M/S. HELLOSOFT INDIA PVT. LTD., HYDERABAD. PAN:AAACZ 0688E V/S. DCIT, CIR-2(2), HYDERABAD. (APPELLANT) (RESPONDENT) DEPARTMENT BY : SRI M.RAVINDER SAI ASSESSEE BY : SRI GOPAL KRISHNA DATE OF HEARING 16-11-2012 DATE OF PRONOUNCEMENT 15-01-2013 . O R D E R PER SAKTIJIT DEY, JUDICIAL MEMBER: THE APPEAL FILED BY THE DEPARTMENT AND THE CROSS OBJE CTION FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER DATED 13- 3-2009 OF CIT (A)-III, HYDERABAD PERTAINING TO THE ASSESSMENT YEAR 20 05-06. ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 2 2. THE DEPARTMENT HAS RAISED THE FOLLOWING EFFECTIVE GROUNDS:- 1. THE LEARNED CIT (A) HAS ERRED IN COMMENTING ADVERSE LY ABOUT THE TURN OVER FILTER APPLIED BY THE TPO AND T HEREBY REJECTED SOME OF THE COMPARABLES SELECTED BY THE TP O. THE ARGUMENTS AND THE FACTS RELIED UPON BY THE CIT(A) I N THIS REGARD ARE INCORRECT. 2. THE LEARNED CIT (A) HAS ERRED IN COMMENTING ADVERSE LY ABOUT THE EMPLOYEE COST TO SALES FILTER APPLIED B Y THE TPO AND THEREBY REJECTED SOME OF THE COMPARABLES SELECT ED BY THE TPO. THE ARGUMENTS AND THE FACTS RELIED UPON B Y THE CIT (A) IN THIS REGARD ARE INCORRECT. 3. THE LEARNED CIT (A) HAS ERRED IN COMMENTING ADVERSE LY ABOUT THE ONSITE INCOME/REVENUE FILTER APPLIED BY THE TPO AND THEREBY REJECTED SOME OF THE COMPARABLES SELECT ED BY THE TPO. THE ARGUMENTS AND THE FACTS RELIED UPON B Y THE CIT (A) IN THIS REGARD ARE INCORRECT. 4. THE LEARNED CIT (A) HAS ERRED IN ALLOWING THE BENEF IT OF DEDUCTION OF 5% UNDER PROVISO TO SEC. 92C(2) OF TH E ACT. THE ARGUMENTS AND THE FACTS RELIED UPON BY THE CIT (A) IN THIS ARE DEVOID OF MERIT. 5. THE LEARNED CIT (A) HAS ERRED IN ALLOWING THE ADDI TIONAL BENEFIT OF RISK ADJUSTMENT OF 1% TO THE TAX PAYER, THE ARGUMENTS AND THE FACTS RELIED UPON BY THE CIT (A) IN THIS REGARD ARE DEVOID OF MERIT. IN GROUND NOS. 1, 2 AND 3, THE DEPARTMENT HAS CHALLEN GED THE REJECTION BY THE CIT (A) OF CERTAIN COMPARABLES SELECTED BY THE TP O APPLYING DIFFERENT FILTERS. ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 3 3. BRIEFLY THE FACTS OF THE ISSUE ARE, THE ASSESSEE IS A WHO LLY OWNED SUBSIDIARY OF HELLOSOFT INC, USA ITS ASSOCIATED ENTERPRISE. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE ON BEHALF OF ITS HOLDING COMPANY AND TRANSFERS THE SOFTWARE TO THE HOLDI NG COMPANY FOR MARKETING AND LICENSING TO ITS CUSTOMERS. FOR THIS PURPOSE, THE ASSESSEE HAS ENTERED INTO AN AGREEMENT WITH ITS HOLDING CO MPANY ACCORDING TO WHICH FOR THE SERVICES RENDERED BY THE ASSESSEE THE HOLDING COMPANY WILL REIMBURSE ALL THE COST INCURRED PLU S 8% MARKUP. IN THE ASSESSMENT YEAR UNDER DISPUTE THE ASSESSEE HAD INTERN ATIONAL TRANSACTIONS WITH ITS HOLDING COMPANY WORTH RS.13,37,43,6 61. THE ASSESSEE ADOPTED THE COST PLUS METHOD (CPM) FOR COMPUTING THE ARMS LENGTH PRICE (ALP) FOR ITS INTERNATIONAL TRANSACTION. FOR THE ASSESSMENT YEAR UNDER DISPUTE, THE ASSESSEE FILED ITS RETURN DECLARIN G AN INCOME OF RS.1,35,205/- AFTER CLAIMING DEDUCTION U/S 10A OF THE A CT. IN COURSE OF THE SCRUTINY ASSESSMENT PROCEEDING THE ASSESSING OFFICER REFER RED THE MATTER TO THE TRANSFER PRICING OFFICER (TPO) U/S 92 CA( 2) OF THE ACT FOR COMPUTING THE ALP. IN COURSE OF THE PROCEEDING BEFORE THE TPO THE ASSESSEE PRODUCED ALL THE DOCUMENTS AS WERE CALLED FOR BY THE TPO. THE TPO AFTER VERIFYING TP STUDY REPORT AND OTHER D OCUMENTS SUBMITTED BY THE ASSESSEE ISSUED ANOTHER LETTER TO THE ASSESSEE MENTIO NING HIS REMARKS ON THE FILTERS ADOPTED BY THE ASSESSEE, ADDITIONA L FILTERS WHICH THE ASSESSEE HAS OMITTED TO APPLY, AND ACCEPTABILITY OF TH E COMPARABLES ADOPTED BY THE ASSESSEE. THE TPO PROPOSED 15 ADDITIONA L COMPARABLES AND ALSO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY TRANSACTION NET MARGIN METHOD (TNMM) SHALL NOT BE ADOPTED IN PLACE O F CPM ADOPTED BY ASSESSEE. THE ASSESSEE SUBMITTED DETAILED REPLY TO THE QUER IES RAISED BY THE TPO. SO FAR AS TPOS PROPOSAL FOR ADOPTING TNMM THE ASSESSEE SUBMITTED THAT TNMM IS SIMILAR TO CPM EXCEPT FOR THE RE ASON THAT CPM IS BASED ON GROSS MARGINS WHEREAS TNMM IS BASED ON NET MARG INS. ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 4 TNMM WOULD NOT BE A PROPER METHOD IN VIEW OF THE FA CT THAT MANY ADJUSTMENTS IS REQUIRED TO BE MADE. IT WAS FURTHER SU BMITTED BY THE ASSESSEE THAT OECD HAS RECOMMENDED THAT TNMM SHOULD BE USED AS A METHOD OF LAST RESORT. THE ASSESSEE SUBMITTED THAT UNDER THE CIRCUMSTANCES CPM IS THE MOST APPROPRIATE METHOD. THE TPO HOWEVER DID NOT AGREE WITH THE CONTENTION OF THE ASSESSEE THAT T HE CPM IS THE MOST APPROPRIATE METHOD ON THE FOLLOWING REASONS:- A) THE CPM METHOD PRESENTS SOME PRACTICAL DIFFICULTIES IN IDENTIFYING THE COSTS INCURRED FOR THE PROVISION OF SERVICES LIKE WHETHER AN INDIRECT COST IS TOWARDS RENDERING SERVICES OR IT IS AN ENTERPRISE LEVEL EXPENSE. B) THERE IS NO DISCERNIBLE LINK BETWEEN THE LEVEL OF C OSTS INCURRED AND A MARKET PRICE IN SOFTWARE SERVICES AS THE SERVICES ARE USUALLY COMPENSATED ON A MAN HOURLY BA SIS WHICH MAY NOT VARY MUCH ACROSS THE INDUSTRY FOR SAM E OR SIMILAR TYPE OF SERVICE. SO, CPM IS NOT THE APPROP RIATE METHOD. C) WHILE APPLYING CPM, THE TAX PAYER SHOULD HAVE CONSI DERED ALL DIRECT AND INDIRECT COSTS INCURRED IN RESPECT O F THE SERVICES RENDERED BY IT. BUT, IT IS APPARENT FROM DETAILS GIVEN ABOVE THAT THE TAX PAYER ITSELF DID NOT INCLU DE ALL THE DIRECT AND INDIRECT COSTS WHILE COMPUTING GROSS MAR K UP E.G. RENT, INSURANCE, REPAIRS WERE NOT CONSIDERED. IN THE CASE OF COMPARABLE COMPANIES, THE DETAILS OF INDIRE CT COSTS INCURRED IN RENDERING SERVICES WERE SIMPLY NO T AVAILABLE. THUS IT CAN NOT BE SAID THAT THE GROSS PROFIT WORKED OUT IN THE CASE OF THE COMPARABLES IS AFTER TAKING INTO ACCOUNT THE SAME ITEMS OF EXPENDITURE AS IN TH E CASE OF HE TAXPAYER. ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 5 D) AS PER THE AGREEMENT, THE TAX PAYERS COST OF PROVI DING SERVICES INCLUDES ALL COSTS THAT HAVE BEEN INCURRED BY THE TAX PAER EXCEPT INTEREST EXPENSES. ALL THESE EXPEN SES ARE REIMBURSED ON COST PLUS BASIS. THE TAX PAYER IS FO RGETTING THAT IT IS ALSO GETTING 8% ON OTHER COSTS WHICH HAV E BEEN EXCLUDED BY THE TAX PAYER IN CPM LIKE RENT, REPAIRS , INSURANCE, LEASE AND HIRE CHARGES ETC. SO, THE GRO SS MARGIN SHOWN BY THE TAX PAYER DISTORTS THE TRUE PIC TURE OF ITS FINANCIALS FOR WHICH TNMM METHOD IS THE MOST APPROPRIATE METHOD AS IT CAPTURES ALL EXPENSES EXCE PT INTEREST, COINCIDING THE COST BASE OF THE TAX PAYER FOR REIMBURSEMENT (AS PER THE AGREEMENT AND INVOICES RA ISED BY THE TAX PAYER). E) IN THE TAXPAYERS CASE ALL THE COSTS WERE INCURRED TOWARDS RENDERING OF SERVICES. THEREFORE, THE GROSS PROFIT IS THE SAME IN THE TAXPAYERS CASE AS THE NET PROFIT. THU S THE TAXPAYERS PLI REMAINS THE SAME WHETHER CPM IS APPL IED OR THE TNMM IS APPLIED. THE DIFFERENCE BETWEEN THE TWO METHODS IN THE TAXPAYERS CASE IS THUS ONLY AN ACAD EMIC INTEREST. 4. THE TPO FOLLOWING THE DECISION OF THE HONBLE SUPRE ME COURT IN CASE OF DIT (INTL. TAXATION) V/S. MORGAN STANLEY (291 ITR 416) REJECTED THE CPM ADOPTED BY THE ASSESSEE AND HELD THAT T NMM IS THE MOST APPROPRIATE METHOD TO COMPUTE THE ALP OF THE INT ERNATIONAL TRANSACTION OF THE ASSESSEE. THE TPO ALSO REJECTED THE TP STUDY REPORT OF THE ASSESSEE BY MENTIONING THE FOLLOWING REASONS:- 1. THE TAXPAYER ITSELF ADMITS THAT THERE WERE NO COMPANIES IN THE DATABASE COMPARABLE TO IT AND ACCORDINGLY HAS CONSIDERED THE ACTIVITY OF SOFTWARE ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 6 DEVELOPMENT AS THE CRITERIA. HAVING GIVEN UP THE DISTINCTION BASED ON VERTICALS OF SOFTWARE DEVELOPM ENT AND HAVING ACCEPTED COMPANIES FURTHER WITHIN THE BROAD AREA OF SWD AS COMPARABLE TO ITSELF IT HAS ST ILL OBJECTED TO MANY COMPANIES AS FUNCTIONALLY DIFFEREN T, ON THE BASIS OF THE VERTICALS IN WHICH THEY WERE OPERATIVE. THIS DEMONSTRATES THE DOUBLE STANDARDS ADOPTED BY THE TAXPAYER W.R.T. SELECTION OF COMPARA BLE COMPANIES. 2. THE TAXPAYER AS ADMITTED THAT THERE WERE MISTAKES I N ITS TP REPORT BOTH IN FAR ANALYSIS AND IN THE COMPUTATION OF PROFIT FOR THE PURPOSE OF CPM METHOD . IN FACT, DESPITE APPLYING THE FILTER OF TURNOVER OF 5 TO 50 CRORES 6 COMPANIES WERE NOT CONSIDERED AT ALL, AS POINTED BY THE TPO IN THE SHOW CAUSE NOTICE DATED 5 -9- 2008. 3. WHILE CALCULATING PROFIT MARGIN MANY EXPENDITURES WERE NOT TAKEN TO ARRIVE AT THE TOTAL COST OF THE COMPARABLES. THIS TANTAMOUNT TO DATA MASSAGING, TO SHIT ITS PURPOSE. 4. NO AUDIT REPORTS OR FINANCIAL STATEMENTS WERE PROVI DED TO VERIFY THE VERACITY OF THE COST DETAILS FURNISHE D, WITH REFERENCE TO THE COMPARABLE COMPANY UNDER THE CMP METHOD CHOSEN BY THE TAXPAYER. 5. THE VERY BASIS OF THE TURNOVER FILTER IS MISCONCEI VED AS IT IS THE FALLACIOUS BELIEVE ON THE PART OF THE TA XPAYER THAT TURNOVER/SALES, IS INTIMATELY LINKED TO PROFIT S. THIS ASPECT HAS BEEN EXPLAINED IN DETAIL BY THE TPO WHIL E DISCUSSING THE TURNOVER FILTER ADOPTED BY THE TPO. 6. DESPITE BEING IN SOFTWARE BUSINESS, MANY COMPANIES HAVE BEEN REJECTED ARBITRARILY ON THE GROUND THAT T HEY ARE HAVING RELATED PARTY TRANSACTION,. WHILE A SPA N OF ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 7 5-50 CRORE WAS ADOPTED BY THE ASSESSEE FOR THE TURNOVER FILTER, HOWEVER, WITH REFERENCE TO RELATED PARTY TRANSACTION IT HAS NOT FIXED ANY REASONABLE LIMIT. THIS IS A MYOPIC APPROACH, AS THE RELATED PARTY TRANSACT ION IS RELEVANT ONLY IF IT IS IN SUCH QUANTUM SO AS TO INFLUENCE THE RESULTS OF THE COMPARABLES,. IT IS F OR THIS REASON THAT TPO HAS OPTED FOR AN RELATED PARTY TRANSACTION @25%. THE GROSS ACT ON THE PART OF TAXPAYER TO REJECT ALL COMPANIES WITH EVEN 1% OF RP T, HAS RESULTED IN A VERY SMALL BASE OF COMPARABLES, W HICH DO NOT REFLECT THE REPRESENTATIVE SAMPLE OF THE SWD INDUSTRY . 5. THE TPO ALSO FOUND SOME OF THE FILTERS ADOPTED BY T HE ASSESSEE TO BE INADEQUATE. THE TPO THEREFORE ADOPTED CERTAIN AD DITIONAL FILTERS. THE FINAL FILTERS ADOPTED BY THE TPO ARE:- 1. COMPANIES WHOSE SOFTWARE DEVELOPMENT SERVICE INCOME IS LESS THAN RS.1 CRORE WERE EXCLUDED. 2. COMPANIES WHOSE SOFTWARE DEVELOPMENT SERVICE IS LESS THAN 75% OF THE TOTAL INCOME WERE EXCLUDED. 3. COMPANIES WHO HAVE MORE THAN 25% RELATED PARTY TRANSACTIONS (SALES AS WELL AS EXPENDITURE COMBINED) OF THE SALES WERE EXCLUDED. 4. COMPANIES WHO HAVE LESS THAN 25% OF THE SALES AS EXPORT SALES WERE EXCLUDED 5. COMPANIES WHO HAVE DIMINISHING REVENUES/PERSISTENT LOSSES FOR THE PERIOD UNDER CONSIDERATION WERE EXCLUDED ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 8 6. COMPANIES HAVING DIFFERENT FINANCIAL YEAR ENDING (I E NOT MARCH 31, 2005) OR DATA IS NOT AVAILABLE FOR 12 MONTHS, WERE REJECTED. 7. COMPANIES WHOSE EMPLOYEE COST TO SALES IS LESS THAN 25% WERE EXCLUDED. 8. COMPANIES WHOSE ONSITE INCOME IS MORE THAN 75% WERE EXCLUDED. OUT OF THE 22 COMPANIES SELECTED AS COMPARABLES BY THE ASSESSE E IN THE TP STUDY REPORT THE TPO REJECTED 20 COMPANIES AND ONLY ACCEPTED GATE GLOBAL SOLUTIONS LTD., AND SASKEN NETWORK SYSTEM L TD. THE TPO PROPOSED 15 COMPANIES AS ADDITIONAL COMPARABLES AND INVIT ED ASSESSEES OBJECTION. THOUGH THE ASSESSEE OBJECTED TO THE COM PANIES PROPOSED AS COMPARABLES, THE TPO REJECTING SUCH OBJECTIONS T REATED THE 15 COMPANIES SELECTED BY HIM AS COMPARABLES ALONG WI TH TWO OUT OF 22 COMPANIES SELECTED BY THE ASSESSEE. THE TPO DETERMI NED THE ARITHMETIC MEAN PLI OF THE COMPARABLES SELECTED @ 26.88% AND AFTER ALLOWING WORKING CAPITAL ADJUSTMENT OF 2.09% DETERMIN ED THE ADJUSTED ARITHMETIC MEAN PLI @24.79%. BY APPLYING THE ARITHM ETIC MEAN PLI THE TPO DETERMINED THE ALP OF THE INTERNATIONAL TRA NSACTION BY THE ASSESSEE WITH ITS HOLDING COMPANY AT RS.15,26,61,330. S INCE THE ASSESSEE HAD DISCLOSED THE PRICE RECEIVED BY IT AT RS.13,37,4 3,661 THE SHORTFALL OF RS.1,89,17,669 WAS PROPOSED AS ADJUSTMENT U /S 92CA OF THE ACT. IN TERMS WITH THE ORDER PASSED BY THE TPO ASSE SSMENT ORDER WAS PASSED U/S 143(3) READ WITH SECTION 92C(3) ADDING THE AMOUNT OF RS.1,89,17,669/- TO THE TOTAL INCOME. 6. THE ASSESSEE CHALLENGING THE ADDITION MADE FILED APPE AL BEFORE THE CIT (A). IN COURSE OF HEARING BEFORE THE CIT (A) THE ASSESSEE OBJECTED TO REJECTION OF CPM ADOPTED BY HE ASSESSEE AND SE LECTING ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 9 TNMM AS THE MOST APPROPRIATE METHOD. THE ASSESSEE FURTH ER SUBMITTED THAT THE FILTERS APPLIED BY THE TPO WERE DE FECTIVE GIVING DEFECTIVE RESULTS AND CANNOT BE ACCEPTED AS COMPARABLES. TH E ASSESSEE SUBMITTED THAT THE TPO HAS SELECTED LARGE SIZE COM PANIES HAVING HUGE TURNOVER WITH PROFIT MARGIN OF MORE THA N 22% WHICH CANNOT BE TREATED AS COMPARABLES. THE ASSESSEE SUBMITTED TH AT THE TPO HAS SELECTED COMPANIES HAVING RELATED PARTY TRANSACTI ONS UPTO 25% WHICH IS CONTRARY TO RULE 10A(A) AND RULE 10B OF I T RULES. THE ASSESSEE FURTHER CONTENDED THAT THE TPO APPLIED THE FIL TER OF SALARY EXPENSES AND COMPANIES WHOSE EMPLOYEE COST TO SALE WAS LE SS THAN 25% WERE EXCLUDED. APPLICATION OF THIS FILTER WAS NOT APPROPRIATE AS THE RELEVANT DATA/INFORMATION WAS NOT AVAILABLE IN R ESPECT OF ALL THE COMPANIES IN THE DATA BASE. IT WAS CONTENDED BY THE ASSESS EE THAT THE SALARY COST MAY NOT BE SHOWN SEPARATELY IN THE ACCOUNTS AN D MAY BE INCLUDED IN THE COST OF SOFTWARE PACKAGE OR IN OPERATING EXPENSES. IT WAS FURTHER CONTENDED BY THE ASSESSEE THAT THE ONSITE INCO ME FILTER APPLIED BY THE TPO IS NOT APPROPRIATE DUE TO UNAVAI LABILITY OF DATA IN RESPECT OF ALL THE COMPANIES IN THE DATABASE AND AS OTHER WISE THE REVENUE FROM ONSITE WILL NOT HAVE ANY IMPACT AS THE ENTIRE INCOME WAS IN FOREIGN EXCHANGE. 7. IT WAS FURTHER SUBMITTED BY THE ASSESSEE THAT TPOS MET HOD OF APPLYING FILTERS AND SELECTING COMPARABLES WAS NOT TRANSP ARENT AS THE TPO HAS GIVEN ONLY THE FINAL SET OF COMPARABLES CHOSEN UN DER TNMM WHICH HAS PREVENTED THE ASSESSEE FROM VERIFYING WHETHER T HE ELIMINATION WAS DONE PROPERLY OR NOT. IT WAS CONTEND ED BY THE ASSESSEE THAT THE TPO HAS FOLLOWED A PICK AND CHOOSE METHO D INSTEAD OF RESTRICTING HIMSELF TO THE ACTUAL SEARCH RESULTS. THE ASSESSEE FURTHER CONTENDED THAT THE TPO FAILED TO APPRECIATE THAT THE ASSESEES FUNCTIONS ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 10 AND RISKS WERE ALTOGETHER DIFFERENT FROM THE COMPARABL E CASES ADOPTED BY HIM. AS THE ASSESSEE WAS A RISK FREE COMPANY AND WA S A CAPTIVE SERVICE PROVIDER SUITABLE RISK ADJUSTMENT WAS REQUIRED T O BE PROVIDED 8. THE CIT (A) UPHELD THE TNMM METHOD ADOPTED BY TH E TPO AS THE MOST APPROPRIATE METHOD BY REJECTING CONTENTIONS OF THE ASSESSEE IN THIS REGARD. THE CIT (A) HOWEVER ACCEPTED THE ASSESSEES CO NTENTION THAT LARGE COMPANIES HAVING MORE THAN RS.100 CRORE TURN OVERS CANNOT BE TREATED AS COMPARABLES. THE CIT (A) FURTHER HELD T HAT THE EMPLOYEE COST TO SALE FILTER ADOPTED BY THE TPO IS N OT APPROPRIATE AS RELEVANT DATA WAS NOT AVAILABLE IN RESPECT OF ALL THE COMPANIES AVAILABLE ON THE DATABASE. MOREOVER, PART OF THE EMPLOYEE COST WAS INCLUDED BY CERTAIN COMPANIES UNDER THE DIFFERENT HEADS LIKE SOFTWAR E PACKAGE COMPANIES UNDER THE DIFFERENT HEADS LIKE SOFTWARE PACK AGE COST OR OPERATING EXPENSES ETC. AS A RESULT OF WHICH THE FILTER CANNOT BE UNIFORMLY AND OBJECTIVELY APPLIED FOR SELECTION OF COMP ARABLES. THE CIT (A) ALSO ACCEPTED ASSESSEES CONTENTION THAT THE TPO WAS NOT CORRECT IN EXCLUDING ALL THE COMPANIES WHOSE ONSITE INCOME WAS MORE THAN 75%. THE CIT (A) FURTHER HELD THAT LOSS MAKING COMPANIES AND COMPANIES HAVING SUPER PROFITS CANNOT BE TREATED AS COMPARABLES. O N THE AFORESAID BASIS THE CIT (A)( SELECTED 11 COMPANIES AS COMPAR ABLES AND DIRECTED THE ASSESSING OFFICER TO FIND OUT THE ARITHMETIC MEAN OF THOSE ELEVEN COMPANIES AND COMPUTE THE ADJUSTED AVERAGE PLI A FTER ALLOWING WORKING CAPITAL ADJUSTMENT AND RISK ADJUSTMENT @3% AND BENEFIT OF (+)/ (-)5% UNDER THE PROVISO TO SEC. 92C(2). 9. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITT ED BEFORE US THAT THE CUT OFF MARK OF 100 CRORES ADOPTED BY THE CIT (A) WHILE APPLYING TURNOVER FILTER IS WITHOUT ANY BASIS IN ABSENCE OF ANY SUCH CUT ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 11 OFF PROVIDED UNDER THE IT ACT, IT RULES OR OECD GUIDE LINES. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE TURNOV ER HAS NO RELATION WITH THE OPERATING PROFIT TO OPERATING COST RATIO. THE LEARNED DEPARTMENTAL REPRESENTATIVE OBJECTING TO THE CIT (A) S OBSERVATION WITH REGARD TO THE EMPLOYEE COST TO SALE FILTER SUBMIT TED THAT WAGE TO SALE RATIO IS AN ACCEPTABLE FILTER WHERE THE EMPLOYEE COST IS TOO LOW OR TOO HIGH. IN THIS CONTEXT, THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED UPON A DECISION OF THE DELHI BENCH OF THE TRIB UNAL IN CASE OF AVAYA INDIA (P) LTD. V/S. ACIT IN ITA NO.5150/DEL/ 2010 DATED 25-2- 2011. THE LEARNED DEPARTMENTAL REPRESENTATIVE ALSO OBJECTED TO THE FINDING OF THE CIT (A) WITH REGARD TO THE ONSITE INCO ME FILTER. 10. THE LEARNED AR SUBMITTED THAT WHILE APPLYING TH E TURNOVER FILTER, THE SCALE OF OPERATION IS A DETERMINING FACTOR FOR DECI DING WHETHER A PARTICULAR COMPANY IS COMPARABLE OR NOT. THE LEARNED A R SUBMITTED THAT A COMPANY WITH SMALL TURNOVER CANNOT BE COMPARED W ITH A COMPANY WITH VERY LARGE TURNOVER. IN SUPPORT OF THIS, THE LEARNED AR RELIED UPON A DECISION OF INCOME-TAX APPELLATE TRIBUNA L, BANGALORE BENCH IN CASE OF GENISYS INTEGRATING SYSTEMS LTD., 64 DTR 225 AND OF INCOME-TAX APPELLATE TRIBUNAL, HYDERABAD BENCH IN CASE O F DELOITTE CONSULTING 61 DTR 101. THE LEARNED AR SUBMITTED THAT THE ASSESSEE IS NOT EXPOSED TO ANY RISK AS THE OWNERSHIP OF INTANGIBLE S BELONGS TO THE AE. AS RISK IS LESS PROFIT IS ALSO LESS. IN THIS CONTEXT, T HE LEARNED AR RELIED UPON INCOME-TAX APPELLATE TRIBUNAL, AHMEDABAD BENCH DECISION IN MASTEK LIMITED V/S. ADDITIONAL. CIT IN ITA NO.312 0/AHD/2010 DATED 29-2-12, MENTOR GRAPHICS (109 ITR 10), SONY INDIA 11 4 ITD 448, INCOME-TAX APPELLATE TRIBUNAL, BANGALORE BENCH DECISION IN CASE OF CONTINUOUS COMPUTING (I) LIMITED 2012-T11-44. THE L EARNED AR JUSTIFYING THE OBSERVATION OF THE CIT (A) WITH REGARD TO ONSITE REVENUE ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 12 FILTER SUBMITTED THAT THIS FILTER CANNOT BE APPLIED AS RELEVANT INFORMATION /MATERIAL ARE NOT AVAILABLE. THE LEARNED AR FURTHE R SUBMITTED THAT EMPLOYEE COST TO SALE FILTER CANNOT BE APPLIED AS MANY COMPANIES, CLUB EMPLOYEE COST UNDER VARIOUS HEADS LIKE SOFTWARE DEVE LOPMENT CHARGES, PROJECT CHARGES, PRODUCT DEVELOPMENT CHARGES, PROF ESSIONAL CHARGES ETC. THE LEARNED AR FURTHER SUBMITTED THAT WHI LE APPLYING THE RELATED PARTY TRANSACTIONS FILTER COMPARABLES WITH RE LATED PARTY TRANSACTIONS SHOULD BE REJECTED IRRESPECTIVE OF THE SCALE/SIZ E OF TRANSACTIONS WITH RELATED PARTY. IN SUPPORT, THE LEARN ED AR RELIED UPON THE DECISION OF THE INCOME-TAX APPELLATE TRIBUNAL IN CASE OF SONY INDIA 114 ITD 448 (DEL). 11. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MAT ERIALS ON RECORD. THE ASSESSEE IN ITS TP STUDY, HAS SELECTED 22 COMPA NIES AS COMPARABLES FOR COMPUTING THE ALP. THE TPO HAS COME TO A CONCLUSION THAT TNMM IS THE MOST APPROPRIATE METHOD TO COMPUTE TH E ALP. THE TPO HAS ACCEPTED ONLY 2 OUT OF 22 COMPANIES SELECTED BY TH E ASSESSEE. THE TPO HAS SELECTED 15 ADDITIONAL COMPANIES IN ADDITIO N TO THE TWO FROM THE COMPANIES SELECTED BY THE ASSESSEE. WHEN TNMM IS A DOPTED FOR DETERMINING ALP ONE HAS TO BE EXTRA CAUTIOUS TO TA KE INTO ACCOUNT THE DIFFERENCES WHICH ARE LIKELY TO MATERIALLY AFFECT T HE PRICE, COST CHARGED OR PAID, THE PROFIT IN THE OPEN MARKET FOR A RRIVING AT A REASONABLE AND ACCURATE ADJUSTMENT. IF THE DIFFERENCES ARE SUCH THAT THEY CANNOT BE SUBJECT TO EVALUATION OR LIKELY TO GIVE A UNREASONABLE RESULT, THEN SUCH TRANSACTIONS SHOULD BE AVOIDED OR ELIMI NATED FOR THE PURPOSE OF COMPARISON. THE OECD IN ITS GUIDELINES HAS AL SO STATED THAT THOUGH TNMM MAY AFFORD A PRACTICAL SOLUTION TO OTHERWI SE INSOLUBLE TRANSFER PRICING PROBLEMS BUT, IT HAS TO BE USED SENSIBL Y AND WITH APPROPRIATE ADJUSTMENTS KEEPING IN VIEW THE DIFFEREN CES BETWEEN THE ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 13 COMPARABLES. IF THE DIFFERENCES IN THE CHARACTERISTICS OF THE ENTERPRISES BEING COMPARED HAVE A MATERIAL EFFECT ON THE NET MARG INS BEING USED IT WOULD NOT BE APPROPRIATE TO APPLY THE TNMM WITHOUT MAKING ADJUSTMENTS FOR SUCH DIFFERENCES. KEEPING IN VIEW THE ABOVE PRINCIPLES IT HAS TO BE SEEN WHETHER THE COMPARABLES SELECTED BY THE TPO ON APPLICATIONS OF DIFFERENT FILTERS IS APPROPRIATE. W HILE THE ASSESSEE WAS HAVING A TURNOVER OF ABOUT RS.13.57 CRORES MANY OF THE COMPARABLES SELECTED BY THE TPO ARE HAVING VERY HIGH TURNOVER OF MORE THAN RS.100 CRORES. IN FACT SATYAM COMPUTERS SERVICES AND INFOSYS LIM ITED ARE GIANTS IN COMPARISON TO THE ASSESSEE. THEREFORE, THOSE COM PANIES CANNOT BE CONSIDERED AS COMPARABLES. THE INCOME-TAX AP PELLATE TRIBUNAL, HYDERABAD BENCH IN CASE OF DELOITTE CONSULTING 61 DTR 101 HELD AS FOLLOWS:- NOW, WE DEAL WITH THE ISSUE WHETHER THE TPO WAS COR RECT IN SELECTING WIPRO BPO HAVING TURNOVER OF 20 TIMES MOR E THAN THE ASSESSEE COMPANY AS COMPARABLE OR NOT. WE FIND THA T THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F DELHI INCOME-TAX APPELLATE TRIBUNAL IN THE CASE OF AGNITY INDIA TECH NOLOGIES PVT. LIMITED (2010) ITA NO.3856/DEL/2010. WE FIND THAT THE WIPRO BPO IS NOT AT ALL COMPARABLE AS THE ASSESSEE COMPANY IS PI GMY COMPARED TO GIANT WIPRO. WIPRO COMPANYS TURNOVER IS 20 TIMES MORE THAN THE ASSESSEE COMPANY. HENCE, THE ASSESSEE COMPANY IS N OT COMPARABLE WITH WIPRO BPO, THE REASONING BEING THAT THE LATTER IS A GIANT COMPANY HAVING 20 TIMES MORE TURNOVER THAN THE ASSESSEE COM PANY. IN VIEW OF THIS BASED ON THE FACTS AND THE CIRCUMSTANCES OF TH E CASE, AND FOLLOWING THE DECISION OF DELHI BENCH OF INCOME-TAX APPELLATE TRIBUNAL IN THE AFORESAID CASE, WE ARE OF THE VIEW THAT WIPR O BPO SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. HE NCE, THE GROUND RAISED BY THE ASSESSEE ON THIS ISSUE IS ALLOWED. ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 14 THE SAME IS ALSO THE VIEW OF THE INCOME-TAX APPELLATE T RIBUNAL BANGALORE BENCH IN CASE OF GENESIS INTEGRATED SYSTEMS LIM ITED (64 DTR (TRIB) (BANG.) 225). 12. IN VIEW OF THE AFORESAID, WE UPHOLD THE DECISION O F THE CIT (A) IN EXCLUDING COMPANIES WHOSE TURNOVER IS MORE THAN RS.100 CR ORES. SIMILARLY THE CIT (A) IS EQUALLY CORRECT IN NOT SUSTAI NING THE REJECTION OF COMPARABLES SELECTED BY THE ASSESSEE BY APPLYING EMPLOYEE COST TO SALE FILTER AS RELEVANT DATA/INFORMATION FOR THIS FIL TER ARE NOT AVAILABLE. MOREOVER, IT IS ALSO A FACT THAT PART OF THE EMPLOYEE COST IS INCLUDED BY MANY COMPANIES UNDER DIFFERENT OTHER HEADS. SELECTION OF COMPARABLES APPLYING THE ONSITE INCOME FILTER ALSO STANDS ON THE SA ME FOOTING AS RELEVANT DATA/INFORMATION ARE NOT AVAILABLE IN RESPE CT OF ALL THE COMPANIES IN THE DATABASE. IT IS ALSO A FACT THAT THOUGH THE TPO HAS HIMSELF NOT APPLIED THIS FILTER BY OBSERVING THAT THE COMPANIES HAVING ONSITE INCOME OF MORE THAN 75% CANNOT BE TREATED AS COMP ARABLES BUT TWO OF THE COMPANIES I.E. M/S FOURSOFT LIMITED AND SANK YA INFOTECH LIMITED SELECTED AS COMPARABLES BY THE TPO WERE HAVING O NSITE INCOME/EXPENSES OF MORE THAN 75%. IN THIS VIEW OF THE MATTER, THE CIT (A) WAS CORRECT IN HOLDING THAT REJECTION OF COMPARA BLES SELECTED BY THE ASSESSEE BY APPLYING THIS FILTER IS NOT CORRECT. WE AL SO FULLY SUBSCRIBE TO THE VIEW OF THE CIT (A) THAT LOSS MAKING CO MPANIES AND COMPANIES HAVING SUPER NORMAL PROFITS CANNOT BE CONSIDERED AS COMPARABLES IN VIEW OF THE RATIO LAID DOWN IN CASE OF MENTOR GRAPHICS (INDIA) PVT. LTD. V/S. DCIT (109 ITD 101) AND PHILI PS SOFTWARE (119 TTJ 721). IN AFORESAID VIEW OF THE MATTER, THE COM PANIES SELECTED BY THE CIT (A) AS COMPARABLES IS RATIONAL AND APPROPRIATE IN THE FACTS OF THE PRESENT CASE. WE THEREFORE UPHOLD THE ORDER OF THE CIT (A) IN DIRECTING THE ASSESSING OFFICER TO COMPUTE THE ARITHMETIC MEAN OF 11 ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 15 COMPARABLES SELECTED BY HIM AND DETERMINE THE ALP AFTER COMPUTING THE ADJUSTED AVERAGE PLI. AS RESULT, GROUNDS NOS. 1, 2 AND 3 ARE DISMISSED. 13. IN GROUND NO. 4 THE DEPARTMENT HAS CHALLENGED T HE DIRECTION OF THE CIT (A) TO GIVE THE BENEFIT OF (+)/(-) 5% UNDE R THE PROVISO TO SECTION 92C (2) OF THE ACT. 14. WE HAVE HEARD THE SUBMISSIONS OF THE PARTIES ON THI S ISSUE. IT APPEARS FROM THE ORDER OF THE CIT (A) THAT BY RELYI NG UPON A DECISION OF THE INCOME-TAX APPELLATE TRIBUNAL, KOLKOTA BENCH I N THE CASE OF DEVELOPMENT CONSULTANTS PVT. LIMITED (115 TTJ 577) AN D INCOME-TAX APPELLATE TRIBUNALS DECISION IN THE CASE OF SONY INDIA PVT. LIMITED (114 ITD 448). THE CIT (A) HAS DIRECTED FOR ALLOWING BENEFIT OF (+)/(-) 5% AS A STANDARD DEDUCTION. THE FINANCE ACT, 2012 A MENDED THE PROVISION OF SECTION 92C OF THE ACT BY INSERTING SECTION ( 2A) WITH RETROSPECTIVE EFFECT FROM 1-4-2002 WHICH READS AS FOLLOWS: - (2A) WHERE THE FIRST PROVISO TO SUB-SECTION (2) AS IT STOOD BEFORE ITS AMENDMENT BY THE FINANCE (NO.2) ACT, 20 09 (33 OF 2009), IS APPLICABLE IN RESPECT OF AN INTERNATIONAL TRANSACTION FOR AN ASSESSMENT YEAR AND THE VARIATION BETWEEN THE AR ITHMETICAL MEAN REFERRED TO IN THE SAID PROVISO AND THE PRICE AT WHICH SUCH TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN EXCEEDS FI VE PER CENT OF THE ARITHMETICAL MEAN, THEN, THE ASSESSEE SHALL NOT BE ENTITLED TO EXERCISE THE OPTION AS REFERRED TO IN T HE SAID PROVISO. ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 16 THE AFORESAID PROVISION MAKES IT CLEAR THAT AN ASSESSEE SH ALL NOT BE ENTITLED TO EXERCISE ITS OPTION AS REFERRED IN THE PRO VISO TO SUB-SECTION (2) IF THE VARIATION BETWEEN THE ARITHMETICAL MEAN AND THE PRICE AT WHICH SUCH TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN EXCEED S 5% OF THE ARITHMETICAL MEAN. IN VIEW OF THE RETROSPECTIVE OPERATION OF THE AFORESAID PROVISION, THE BENEFIT OF (+)/(-) 5% AS A STA NDARD DEDUCTION CANNOT BE ALLOWED. THAT APART THIS ISSUE IS ALSO COVERED I N FAVOUR OF THE DEPARTMENT BY THE DECISION OF THE CO-ORDINATE BENCH OF THE TRIBUNAL IN CASE OF DELOITTE CONSULTING INDIA PVT. LIMITED (SUPRA) . THE DIRECTION GIVEN BY THE CIT (A) IS MODIFIED TO THIS EXTENT. HENCE, THE GROUND RAISED BY THE DEPARTMENT IS ALLOWED. 15. GROUND NO.5 RELATES TO THE CIT (A) DIRECTING THE ASSESSING OFFICER TO ALLOW RISK ADJUSTMENT OF 1% WHILE COMPUTING THE ADJ USTED AVERAGE PLI. IN THIS CONTEXT, THE LEARNED DEPARTMENTAL REP RESENTATIVE SUBMITTED THAT THE TPO HAS GIVEN VALID REASONS FOR NOT ALLOWING ANY ADJUSTMENT ON ACCOUNT OF RISKS WHICH HAS BEEN NEGATED BY THE CIT (A) WITHOUT MAKING PROPER DISCUSSION. IN SUPPORT OF HIS CONT ENTION, THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED ON THE OR DER OF THE TRIBUNAL IN CASE OF SYMANTEC SOPFTWARE SOLUTIONS PVT. LTD. V/S. ACIT IN ITA NO.7894/MUM/2010. 16. THE LEARNED AR, ON THE OTHER HAND. SUBMITTED TH AT THE TPO HAS WRONGLY ASSUMED THAT THE ASSESSEE RUNS ALL THE RISKS OF RUNNING THE BUSINESS. THE LEARNED AR SUBMITTED THAT THE ASSESSEE BEIN G A CAPTIVE SERVICE PROVIDER, IT DOES NOT HAVE ANY RISK AT ALL. IN THIS CONTEXT, THE LEARNED AR REFERRED TO THE FUNCTIONAL ANALYSIS CHECKLIST AT PAGE 96 OF THE PAPER BOOK. ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 17 17. WE HAVE HEARD THE SUBMISSIONS OF THE PARTIES IN THIS REGARD. THE MATERIALS ON RECORD CLEARLY PROVE THE FACT THAT THE ASSESSE E IS A CAPTIVE SERVICE PROVIDER. IT HAS TRANSACTIONS ONLY WITH ITS AE. IT IS ALSO A FACT THAT ALL THE RISKS LIES WITH THE AE. DIFFERENT BENCHE S OF THE TRIBUNAL HAVE ALSO TAKEN A DIVERGENT VIEW ON THIS ISSUE. THE INCOME-TAX APPELLATE TRIBUNAL, MUMBAI BENCH IN THE CASE OF SIMONT ECH (SUPRA) HAS HELD THAT NO SEPARATE ADJUSTMENT IS REQUIRED ON AC COUNT OF RISK AND FUNCTIONAL DIFFERENCE, THE INCOME-TAX APPELLATE TR IBUNAL DELHI BENCH IN THE CASE OF SONY INDIA PVT. LIMITED V/S. DC IT (114 ITD 448) HAS HELD THAT DEDUCTION ON ACCOUNT OF OWNERSHIP OF INTAN GIBLES, RISK FACTORS CAN BE ALLOWED. IN AFORESAID VIEW OF THE MATT ER, WE ARE INCLINED TO ACCEPT THE VIEW FAVORABLE TO THE ASSESSEE. WE THEREFORE UPHOLD THE DIRECTION OF THE CIT (A) IN THIS REGARD IN ALLOWING THE BENEFIT OF RISK ADJUSTMENTS AT 1%. ACCORDINGLY, THE GROUND RAISE D BY THE DEPARTMENT IS DISMISSED. 18. IN THE RESULT, THE APPEAL FILED BY THE DEPARTM ENT STANDS PARTLY ALLOWED. 19. IN SO FAR AS THE CROSS OBJECTION NO.40/HYD/2009 FILED BY THE ASSESSEE IS CONCERNED, IN GROUND NOS. 1 TO 4, THE ASSESSEE HAS CHALLENGED THE ADOPTION OF TNMM FOR COMPUTATION OF AL P. 20. AS MENTIONED HEREINBEFORE THE ASSESSEE IN ITS TP ST UDY REPORT HAD ADOPTED CPM AS THE MOST APPROPRIATE METHOD TO BEN CH-MARK ITS INTERNATIONAL TRANSACTION. OBJECTING TO THE PROPOSED A DOPTION OF TNMM BY THE TPO THE ASSESSEE HAD SUBMITTED THAT CONSIDERING TH E FUNCTIONAL DIFFERENCES AND THE CONTRACTUAL TERMS ADOPTION OF CPM IS MORE APPROPRIATE. IT WAS SUBMITTED BY THE ASSESSEE THAT IN TN MM MANY ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 18 ADJUSTMENTS NEEDS TO BE MADE. IT WAS FURTHER SUBMITTED OECD HAS RECOMMENDED THAT TNMM SHOULD BE USED AS THE METHOD OF LAST RESORT. THE TPO HAS REJECTED CPM BY CITING FOLLOWING REASONS A) THE CPM METHOD PRESENTS SOME PRACTICAL DIFFICULTIE S IN IDENTIFYING THE COSTS INCURRED FOR THE PROVISION OF SERVICES LIKE WHETHER AN INDIRECT COST IS TOWARDS RENDERING SERVI CES OR IT IS AN ENTERPRISE LEVEL EXPENSE. B) THERE IS NO DISCERNIBLE LINK BETWEEN THE LEVEL O F COSTS INCURRED AND A MARKET PRICE IN SOFTWARE AS THE SERVICES ARE USUALLY COMPENSATED ON A MAN HOURLY BASIS WHICH MAY NOT VAR Y MUCH ACROSS THE INDUSTRY FOR SAME OR SIMILAR TYPE OF SER VICE. SO, CPM IS NOT THE APPROPRIATE METHOD. C) WHILE APPLYING CPM, THE TAX PAYER SHOULD HAVE CO NSIDERED ALL DIRECT AND INDIRECT COSTS INCURRED IN RESPECT OF THE SERVI CES RENDERED BY IT. BUT, IT IS APPARENT FROM DETAILS GI VEN ABOVE THAT THE TAX PAYER ITSELF DID NOT INCLUDE ALL THE D IRECT AND INDIRECT COSTS WHILE COMPUTING GROSS MARK UP E.G. R ENT, INSURANCE, REPAIRS WERE NOT CONSIDERED. IN THE CASE OF COMPARABLE COMPANIES, THE DETAILS OF INDIRECT COSTS INCURRED IN RENDERING SERVICES WERE SIMPLY NOT AVAILABLE. THUS, IT CAN NOT BE SAID THAT THE GROSS PROFIT WORKED OUT IN THE CAS E F THE COMPARABLE IS AFTER TAKING INTO ACCOUNT THE SAME IT EMS OF EXPENDITURE AS IN THE CASE OF THE TAXPAYER. D) AS PER THE AGREEMENT, THE TAX PAYER'S COST OF PR OVIDING SERVICES INCLUDES ALL COSTS THAT HAVE BEEN INCURRED BY THE T AX PAYER EXCEPT INTEREST EXPENSES. ALL THESE EXPENSES ARE REIMBURS ED ON COST PLUS BASIS. THE TAX PAYER IS FORGETTING THAT EXCEPT IN TEREST EXPENSES. IT IS ALSO GETTING 8% ON OTHER COSTS WHICH HAVE BEEN EXCLUDED BY THE TAX PAYER IN CPM LIKE RENT, REPAIRS, INSURANCE, LEASE A ND HIRE CHARGES ETC. SO, THE GROSS MARGIN SHOWN BY THE TAX PAYER DISTORT S THE TRUE PICTURE OF ITS FINANCIALS FOR WHICH TNMM METHOD IS THE MOST APPROPRIATE METHOD AS IT CAPTURES ALL EXPENSES EXCEPT INTEREST, COINCIDING THE COST BASE OF THE TAX PAYER FOR REIMBURSEMENT (A PER THE AGREEMENT AND INVOICES RAISED BY THE TAX PAYER) E) IN THE TAXPAYER'S CASE ALL THE COSTS WERE INCUR RED TOWARDS RENDERING OF SERVICES. THEREFORE, THE GROSS PROFIT IS THE SAME IN THE TAXPAYER'S CASE AS THE NET PROFIT. THUS THETAXPAYER 'SPL1 REMAINS THE SAME WHETHER CPM IS APPLIED OR THE TNMM IS APPLIED. THE DIFFERENCE BETWEEN THE TWO METHODS IN THE TAXPAYER'S CASE IS THUS ONLY AN ACADEMIC INTEREST. ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 19 THE CIT (A) HAS ALSO SUSTAINED THE VIEW OF THE TPO BY OBSERVING IN THE FOLLOWING MANNER:- I AGREE WITH THE AFORESAID REASONING OF THE TPO FO R REJECTING THE CPM TO BE APPLIED IN THE CASE OF THE APPELLANT AS T HE MOST APPROPRIATE METHOD. TPO'S STAND GETS SUPPORT FROM THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF MORGAN 5TANLEY (291 ITR 16) WHERE IT WAS HELD THAT TNMM WAS THE MOST APPROPRIATE METHOD IN THE CASE OF SERVICE PE AS THE TNMM APPORTIONS THE TOTAL OPERATING PROFIT ARISING FROM THE TRANSACTIONS ON THE BASIS OF SALES, COST, ASSETS ETC. HENCE, THE ADOPTION OF TNMM AS THE MOST APPROPRIATE METHOD IN THE CASE OF THE APP ELLANT, IS UPHELD . IT IS ALSO PERTINENT TO MENTION HERE THAT SINCE A.Y. 2002-03, TPO HAS ADOPTED TNMM METHOD IN THE CASE OF THE APPELLANT FOR DETERM INING THE ALP OF ITS INTERNATIONAL TRANSACTIONS WITH AE. THE SAME WAS AC CEPTED BY THE APPELLANT IN EARLIER YEARS. 21. WE HAVE HEARD SUBMISSIONS OF THE PARTIES. WE HAVE ALSO APPLIED OUR MIND TO THE DECISIONS CITED BEFORE US. IT IS SEEN T HAT THE ASSESSEE HAS ITSELF ACCEPTED THAT TNMM IS SIMILAR TO CPM EXCEPTING THAT CPM IS BASED ON GROSS MARGINS WHEREAS TNMM IS BASED ON NET MARGIN S. THE ASSESSEE HAS ALSO ACCEPTED THAT IF PROPER SELECTION CRITERIA A RE ADHERED TO APPLICATION OF TNMM WOULD ALSO RESULT IN THE FACT TH AT THE PRICE AT WHICH THE ASSESSEE HAS UNDERTAKEN THE INTERNATIONAL TRANSA CTIONS ARE AT ARMS LENGTH. THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF COCA COLA INDIA INC V/S. ACIT (309 ITR PAGE 14) H AS HELD THAT MERELY BECAUSE THE ASSESSEE HAS CHOSEN ONE OF THE METHODS, IT DOES NO T TAKE AWAY THE DISCRETION OF THE TPO TO SELECT ANY OTHER METH OD WHICH MAY BE CONSIDERED TO BE MORE APPROPRIATE FOR THE PURPOSE O F DETERMINING THE TRUE INCOME. IT IS ALSO A CRUCIAL FACT THAT THE ASSESSE E HAS NOT DISPUTED ADOPTION OF TNMM BY THE TPO IN THE EARLIER ASSESSMENT YEARS. IN AFORESAID VIEW OF THE MATTER, WE ARE INCLINED TO A GREE WITH THE FINDING OF THE CIT (A) ON THIS ISSUE. ACCORDINGLY, THE GROUND RAISED BY THE ASSESSEE IS DISMISSED. ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 20 22. IN GROUND NO.5 THE ASSESSEE HAS CHALLENGED THE REJECT ION OF ITS CONTENTION THAT THE ASSESSING OFFICER HAS TO PROVE THE TRA NSFER OF PROFIT TO AE WHILE MAKING ADJUSTMENTS TO ALP AS ASSESSEES INCOME IS EXEMPT. 23. IN THIS CONTEXT, IT IS THE CONTENTION OF THE LEARNE D AR THAT TRANSFER PRICING PROVISIONS ARE INTENDED FOR CHECKING TH E SHIFTING OF PROFIT FROM ONE TAX JURISDICTION TO ANOTHER. THE LE ARNED AR SUBMITTED THAT SINCE THE ASSESSEES INCOME IN INDIA IS EXEMPT U/S 10A OF THE ACT THERE IS NO NEED FOR SHIFTING PROFIT TO ITS AE. IN SUP PORT OF SUCH CONTENTION THE LEARNED AR RELIED UPON CIRCULAR NO.12 DATED 23-8-2001 OF THE CBDT AND THE DECISIONS OF THE TRIBUNAL IN CASE OF PHILIPS SOFTWARE 119 TTJ (BANG.) 721. 24. THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THE O THER HAND SUBMITTED THAT THERE IS NO NEED FOR THE ASSESSING OFFICER TO PROVE THAT THE ASSESSEE HAD SHIFTED PROFITS TO ITS AE WHILE MAKING ADJUSTMENTS IN ALP. IN THIS CONTEXT THE LEARNED DEPARTMENTAL REPRE SENTATIVE RELIED UPON THE DECISION OF THE P & H HIGH COURT IN CASE OF COCA COLA INDIA INC (309 ITR 194) AND DECISION OF THE INCOME-TAX APPELLATE TRIBUNAL, BANGALORE BENCH IN CASE OF SAP LABS (I) PVT. LIMITED IN ITA 398/BANG/2009 DATED 30-8-2010. 25. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MAT ERIALS ON RECORD. WE HAVE ALSO EXAMINED THE DECISIONS RELIED UPON BY THE ASSESSEE. OUR FINDING ON THE ISSUE IS THOUGH IT IS A F ACT THAT ASSESSEES INCOME IS EXEMPT U/S 10A OF THE ACT BUT THAT DOE S NOT NECESSARILY MEAN THAT THE ASSESSING OFFICER HAS TO PROVE THE SHIFTING OF PROFITS BY THE ASSESSEE TO ITS AE BEFORE APPLYING TRANSFE R PRICING PROVISION. THE HONBLE P & H HIGH COURT IN THE CASE OF C OCA COLA INDIA ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 21 INC V/S. ACIT (309 ITR PAGE 14) WHILE CONSIDERING SOME WHAT SIMILAR ISSUE HELD IN THE FOLLOWING MANNER:- WE DO NOT FIND ANY AMBIGUITY OR ABSURD CONSEQUENCE OF APPLICATION OF CHAPTER-X TO PERSONS WHO ARE SUBJEC T TO JURISDICTION OF TAXING AUTHORITIES IN INDIA NOR WE FIND ANY STATUTORY REQUIREMENT OF ESTABLISHING THAT THERE IS TRANSFER OF PROFIT OUTSIDE INDIA OR THAT THERE IS EVASION OF TA X. ONLY CONDITION PRECEDENT FOR INVOKING PROVISIONS OF CHAP TER X IS THAT THERE SHOULD BE INCOME ARISING FROM INTERNATIONAL TRANSACTION AN D SUCH INCOME IS TO BE COMPUTED HAVING REGARD TO ARMS LENGTH PRICE. INTERNATIONAL TRANSACTION AS DEFIN ED U/S 92B OF THE ACT, AS ALREADY OBSERVED, CERTAINLY STANDS ON A DIFFERENT FOOTING THAN ANY OTHER TRANSACTION. ARMS LENGTH PR ICE IS NOTHING BUT A FAIR PRICE WHICH WOULD HAVE BEEN NORMAL PRICE . THERE IS ALWAYS A POSSIBILITY OF TRANSACTION BETWEEN A NON-R ESIDENT AND ITS ASSOCIATES BEING UNDER VALUED AND HAVING REGARD TO SUCH TENDENCY, A PROVISION THAT INCOME ARISING OUT OF TH E SAID TRANSACTION COULD BE COMPUTED HAVING REGARD TO ARMS LENGTH PRICE, WILL NOT BE OPENED TO QUESTION AND IS WITHIN THE LEGISLATIVE COMPETENCE TO EFFECTUATE THE CHARGE OF TAXING REAL INCOME IN INDIA. THE INCOME-TAX APPELLATE TRIBUNAL, BANGALORE BENCH IN CASE OF M/S SAP LABS INDIA PVT. LIMITED V/S. ACIT (ITA NO.398/BANG ./2008) DATED 30 TH AUGUST, 2010 WHILE CONSIDERING IDENTICAL ISSUE HELD IN T HE FOLLOWING MANNER:- THE ARGUMENT OF THE ASSESSEE WITH REFERENCE TO SEC. 10A STATUS ALSO NEEDS A MENTION. IT IS THE CASE OF THE ASSESS EE THAT IT IS ENJOYING SEC. 10A BENEFIT AND NO TAX IS PAYABLE ON EXPORT INCOME, WHICH MAKES THE INDIAN TAX RATE MORE ATTRAC TIVE THAN GERMAN TAX RATE AND THEREFORE, THERE COULD BE NO MO TIVE TO UNDERSTATE ASSESSEES INCOME. THIS ARGUMENT COULD BE A GOOD ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 22 LOGIC, BUT ONLY FOR THOSE ASSESSMENT YEARS COVERED BY SEC. 10A BENEFIT. ONCE THE BENEFIT IS EXHAUSTED, THE ASSESS EE WOULD BE LIABLE FOR TAXATION IN WHICH CASE, THE GERMAN TAX RATE MAY BE MORE ATTRACTIVE. IF THE PRICING FOR THE EXEMPTED YE ARS IS ACCEPTED WITHOUT ANALYSIS THERE IS EVERY CHANCE THA T THE ASSESSING AUTHORITY MIGHT BE ESTOPPED, ON THE DOCTR INE OF CONSISTENCY, FROM EXAMINING THE PRICING FOR THE SUBSEQUENT NON- EXEMPTED YEARS. THIS IS QUITE UNCALLED FOR. IN VIEW OF THE AFORESAID JUDICIAL PRONOUNCEMENTS, THE CO NTENTION RAISED BY THE ASSESSEE IS NOT ACCEPTABLE. ACCORDINGLY, THE GROUND RAISED BY THE ASSESSEE IN ITS CROSS OBJECTION IS DISMISSED. 26. NOW, WE DEAL WITH ITA NO. 1411/HYD/2010 FILED B Y THE ASSESSEE. IN THIS APPEAL, THE ASSESSEE HAS CHALLENGED THE ASSESSMENT ORD ER DATED 8-10-2010 READ WITH SECTION 92CA AND 144C OF THE ACT O N THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (DRP). THE APPEAL PERTAINS TO THE ASSESSMENT YEAR 2006-07. 27. THE GROUNDS RAISED BY THE ASSESSEE GIVES RISE TO THE FO LLOWING TWO ISSUES. I) TNMM METHOD ADOPTED BY THE TPO CANNOT BE CONSIDER ED AS MOST APPROPRIATE METHOD IN PLACE OF COST PLUS METHOD ADOPTED BY THE ASSESSEE. II) THE ADDITION OF RS.1,89,17,699/- ON ACCOUNT OF ADJ USTMENT TO THE ALP IS WITHOUT ANY JUSTIFIED BASIS AS THE COMPAR ABLES SELECTED BY THE TPO BY APPLYING CERTAIN FILTERS ARE NOT PROPER. THE FACTS BEING MORE OR LESS SIMILAR TO THE ASSESSMENT YEAR 2005-06 DEALT IN DETAIL HEREINBEFORE IN DEPARTMENTAL APPEAL NO. 645/HYD/2010, IT IS NOT NECESSARY TO DEAL WITH ALL THOSE FACTS OVER AGAI N IN THIS APPEAL. ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 23 FOR THE ASSESSMENT YEAR UNDER DISPUTE, THE ASSESSEE ENTERED INTO INTERNATIONAL TRANSACTION WITH ITS AE WORTH RS.16,96,54 ,026/-. FOR THE IMPUGNED ASSESSMENT YEAR, THE ASSESSEE FILED ITS RETURN OF INCOME ON 16-11-2006 DECLARING A TOTAL INCOME OF RS.1,82,742/- A FTER CLAIMING DEDUCTION OF RS.1,18,73,994/- U/S 10A OF THE ACT. FOR COMPUTING THE ALP OF INTERNAL TRANSACTION, THE ASSESSEE ADOPTED COST PLU S METHOD (CPM) AS WAS THE CASE IN THE PRECEDING ASSESSMENT YEAR 2005 -06. IN COURSE OF ASSESSMENT PROCEEDINGS U/S 143(3) OF THE ACT, THE ASSESSING OFFICER MADE A REFERENCE TO THE TPO U/S 92CA OF THE ACT TO DETERMINE THE ALP. IN COURSE OF PROCEEDING BEFORE THE TPO, THE ASSESSEE PRODUCED VARIOUS DOCUMENTS ALONG WITH TP STUDY REPORT. IN THE TP STUDY REPORT, THE ASSESSEE HAD SELECTED 17 COMPANIES AS COMPA RABLES. THE TPO REJECTED THE CPM METHOD ADOPTED BY THE ASSESSEE BY OBSERVING THAT DUE TO LACK OF ASSESSABLE INFORMATION ON INDEPENDENT COMPARABLE TRANSACTION OR ABOUT THE GROSS PROFIT MARGIN S, THE TPO HELD THAT IN ASSESSEES CASE TNMM IS THE MOST APPROPRIATE METHOD IN VIEW OF THE AVAILABLE DATA IN PUBLIC DOMAIN. THE TPO WHILE E XAMINING THE TP STUDY REPORT CAME TO A CONCLUSION THAT MOST OF COMPARABLES SELECTED BY THE ASSESSEE ARE EITHER FUNCTIONALLY DISSIMILAR OR NOT WO RKING IN COMPARABLE CIRCUMSTANCES. THEREFORE, THE TP STUDY FAILS TH E FUNDAMENTAL TASTE OF RELIABILITY AND CORRECTNESS. TH E TPO FURTHER OBSERVED THAT THE ASSESSEE HAS REJECTED MANY COMPANIES WHICH OTHERWISE QUALIFIES FILTERS APPLIED BY THE ASSESSEE ITSELF. THE TPO FURTHER FOUND THAT THE ASSESSEE HAS USED EARLIER TWO YEARS DATA IN CASE OF COMPARABLES EVEN THOUGH THEY ARE NOT COMPARABLES AS PER THE ASSESSEES OWN SUBMISSION IN THE TP DOCUMENTATION. 28. IT WAS FURTHER OBSERVED THAT THE ASSESSEE HAS NOT APP LIED THE 25% RELATED PARTY TRANSACTIONS UNIFORMLY AND HAVE SEL ECTED EVEN ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 24 THOUGH THEY DID NOT QUALIFY THIS FILTER. IT WAS FURTH ER OBSERVED THAT THE ASSESSEE HAS CONSIDERED MANY COMPANIES HAVING PREDOMINANTL Y ONSITE TRANSACTION THOUGH THE ASSESSEE IS A 100% OFFSHORE RESEARCH DEVELOPMENT SERVICE PROVIDER AKIN TO A SOFTWARE DEVELO PMENT PROVIDER. ON THE AFORESAID BASIS, THE TPO HOLDING THAT THE DATA USED BY THE ASSESSEE AS UNRELIABLE AND INCORRECT REJECTED THE TP STUDY REPORT AND THE COMPARABLES SELECTED BY THE ASSESSEE AND UNDERTOOK A SEARCH PROCESS HIMSELF FOR SELECTING ADDITIONAL COMPARABLES. TH E TPO APPLIED CERTAIN ADDITIONAL FILTERS FOR SELECTION OF COMPARABLES. BY APPLYING THE SAID FILTERS, THE TPO SELECTED 20 COMPANIES AS COMPARABLES WHICH ARE AT PAGE 108 OF TP ORDER PASSED BY HIM. THE TPO BY CONSI DERING THE OPERATIONAL PROFIT TO TOTAL COST RATIO OF THE COMPARAB LES SELECTED BY HIM COMPUTED ARITHMETIC MEAN PLI AT 20.68% AFTER ALLOWI NG WORKING CAPITAL ADJUSTMENT OF 1.51%, THE ADJUSTED ARITHMETIC ME AN PLI WAS DETERMINED AT 19.17%. BY APPLYING THE AFORESAID ADJU STED ARITHMETIC MEAN PLI , THE ALP WAS COMPUTED AT 119.17% OF THE OPE RATING COST AND ALP OF THE INTERNATIONAL TRANSACTION WAS DETERMIN ED AT RS.18,60,76,624/-. AS THERE WAS A SHORTFALL OF RS.1,66, 94,486/-, THE TPO RECOMMENDED FOR THE ADJUSTMENT OF THE SAME U/S 92C A OF THE ACT. THE ADJUSTMENT IN ALP BY THE TPO WAS CHALLENGED BEFORE THE DRP. THE DRP HOWEVER DID NOT ACCEPT THE CONTENTION S RAISED BY THE ASSESSEE AND UPHELD THE ALP CALCULATED BY THE TPO. 29. THE LEARNED AR SUBMITTED BEFORE US THAT THE REJECT ION OF CPM METHOD BY TPO IS WITHOUT ANY PROPER REASONING AND TH E ANOMALIES POINTED BY THE TPO ARE ON ACCOUNT OF MIS-INTERPRETATI ON OF THE OECD GUIDELINES AND ICA GUIDELINES. THE REJECTION OF THE SEL ECTED COMPARABLES UNDER CPM IS WITHOUT ANY BASIS. THE LEAR NED AR SUBMITTED THAT TPO HAS APPLIED DEFECTIVE SELECTION CRITER IA WHILE ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 25 SELECTING COMPARABLES WHICH WILL NEVER GIVE CORRECT RESULTS . THE LEARNED AR SUBMITTED THAT THE TPO HAS CONSIDERED COMPARA BLES HAVING HUGE TURNOVER COMPARED TO THE TURNOVER OF THE ASSESSEE. THE LEARNED AR SUBMITTED THAT SOME OF THE COMPARABLES ARE ALSO FUNCT IONALLY DISSIMILAR. THE LEARNED AR SUBMITTED THAT COMPANIES HAV ING EXTRAORDINARY PROFITS WERE ALSO CONSIDERED. THE LEARN ED AR FURTHER SUBMITTED THAT THE TPO WAS TOTALLY INCORRECT IN SELECTING /REJECTING COMPARABLES WHILE APPLYING THE EMPLOYEE COST TO SALE FILTER AND ONSITE INCOME FILTER. IT WAS FURTHER SUBMITTED BY THE LEARNED AR THAT THE TPO HAD ALSO FAILED TO GIVE ADJUSTMENT TOWARDS FU NCTIONS, ASSETS EMPLOYED AND RISKS WHILE ARRIVING AT THE ALP. 30. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, STRONGLY SUPPORTED THE ORDER OF THE DRP AND TPO. 31. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MA TERIAL ON RECORD. SO FAR AS THE FIRST ISSUE IS CONCERNED, WE UPHOLD THE ORDERS OF THE LOWER AUTHORITIES IN APPLYING TNMM AS THE MOST APP ROPRIATE METHOD, IN VIEW OF OUR DETAILED REASONING GIVEN IN A SSESSEES C.O. NO. 40/HYD/2009 (SUPRA). HENCE THE ASSESSEES CONTENTION ON THIS ISSUE IS REJECTED. 32. HOWEVER, SO FAR AS COMPARABLES SELECTED BY THE TPO BY APPLYING CERTAIN FILTERS ARE CONCERNED, IT IS SEEN THAT WHILE APPL YING THE TURNOVER FILTER THOUGH THE TPO HAS EXCLUDED COMPANIES HAVING TU RNOVER OF LESS THAN RS.1 CRORE, HE HAS NOT APPLIED ANY UPPER LIMIT. EIGHT OF THE COMPANIES, OUT OF 20 SELECTED BY THE TPO ARE HAVING TUR NOVER OF MORE THAN RS.100 CRORES AND AT LEAST FIVE OF THEM ARE HAVI NG TURNOVER OF MORE THAN RS.200 CRORES VIZ., INFOSYS LIMITED (RS.9028.0 0 CRORES),MINDTREE CONSULTING LIMITED (RS.448.78 CRORES), PERSISTENT SYSTEMS LIMITED (RS.209.18 CRORES), SASKEN COMMUNICATION LIMITED (RS.240.03 CRORES), FLEXTRONICS SOFTWARE SYSTEMS LIMITED ( RS.595.12 ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 26 CRORES) AND IGATE GLOBAL SOLUTIONS LIMITED (RS.527.9 1 CRORES). COMPARED TO THE AFORESAID COMPANIES, THE ASSESSEES TURNOVE R IS ABOUT ONLY RS.17 CRORES. HENCE, COMPANIES HAVING HUGE TURNOVER CANNOT BE TREATED AS COMPARABLES. 33. SIMILARLY, COMPANIES HAVING EXTRAORDINARILY HIG H PROFITS ALSO CANNOT BE CONSIDERED AS COMPARABLES. IN THIS CATEGORY COM ES INFOSYS LIMITED (40.38%), KALS INFOSYSTEMS LIMITED (39.75%), M EGASOFT LIMITE4D (52.74%) AND ACCEL TRANSMITTING LIMITED (44.0 7%). 34. THE ACCEPT/REJECT MATRIX OF THE COMPARABLES ADOPTED BY THE TPO BY APPLYING EMPLOYEE COST TO SALE FILTER AND ONSIT E INCOME FILTER ALSO CANNOT BE ACCEPTED IN VIEW OF OUR OBSERVATION IN D EPARTMENTS APPEAL NO. 645/HYD/09. THESE FACTORS HAVE NOT AT AL L BEEN CONSIDERED BY THE DRP IN ITS ORDER PASSED U/S 144C (5) OF THE I T ACT. IN AFORESAID VIEW OF THE MATTER, WE CONSIDER IT PROPER TO SET ASIDE THE ORDER PASSED BY THE DRP AS WELL AS ASSESSMENT ORDER PASSED IN CONSEQUENCE T HERETO AND REMIT THE MATTER BACK TO THE TPO WHO SHALL RE-COMP UTE THE ALP IN ACCORDANCE WITH THE OBSERVATIONS MADE BY US HEREIN ABOVE AND ALSO IN THE DEPARTMENTS APPEAL IN ITA NO.645/HYD/09 (SUPRA). NEEDLESS TO MENTION HERE THAT THE TPO SHALL AFFORD A REASONABLE O PPORTUNITY OF BEING HEARD TO THE ASSESSEE. BEFORE PARTING, WE WOULD LIKE TO OBSERVE THAT THOUGH THE TPO IS EMPOWERED UNDER THE PROVISIONS OF THE ACT TO COLLECT INFORMATION U/S 133(6) OF THE ACT. BUT, AT THE SAME TIME, PRINCIPLES OF NATURAL JUSTICE DEMAND THAT THE INFORMATI ON SO COLLECTED, IF PROPOSED TO BE UTILISED, THEN THE SAME HAS TO BE CONFRON TED TO THE ASSESSEE. 35. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS TR EATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO.645 AND CO 40 OF 2009 HELLOSOFT INDIA PVT. LTD. 27 36. TO SUM UP, ITA NO.645/HYD/09 FILED BY THE DEPART MENT IS PARTLY ALLOWED. C.O. NO.40/HYD/2009 FILED BY THE ASSESSEE IS DISM ISSED AND ITA NO. 1411/HYD/10 FILED BY THE ASSESSEE IS PARTLY ALLOW ED FOR STATISTICAL PURPOSES. ORDER WAS PRONOUNCED IN THE COURT ON 15 -01- 2013. SD/- SD/- (CHANDRA POOJARI) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DT/- 15 TH JANUARY, 2013. COPY FORWARDED TO: 1. HELLOSOFT INDIA PRIVATE LIMITED, 8-2-703, ROAD NO.12, BANJARA HILLS, HYDERABAD. 2. 3. 4. DCIT, CIR-2(2), HYDERABAD. ADDITIONAL. CIT (TRANSFER PRICING), HYDERABAD. CIT CONCERNED, HYDERABAD. 5 DEPARTMENTAL REPRESENTATIVE, ITAT, HYDERABAD. JMR *